Get to know your homeowners insurance policy

Homeowners insurance is usually required by mortgage lenders. But even if it’s not required, a policy is highly recommended. Get to know what homeowners insurance covers before you accept the policy — and ideally before you need to make a claim.

Types of homeowners insurance coverage

There are many different types of policies, including special coverages for condos, mobile homes and historic homes. The types of policies for single family homes begin with the most basic, which offer limited coverage for damage from a short list of “perils” and only cover the current cash value of the dwelling and other items named. There are more comprehensive policies which cover the replacement value of the house and other named items, due to damage from anything not explicitly exempted.

The most common type of policy falls somewhere in between. However, it may default to cover the cash value rather than the replacement value of the house and other items. It’s important that you look at the causes and kinds of damage that are covered and the version of your home’s “value” being insured before you buy insurance and/or make a claim. Earthquake and flood damage, for instance, are usually not covered in a standard policy. These require separate insurance policies. 

What does homeowners insurance cover?

Within the most common and more comprehensive types of policies, insurance coverages are typically broken down into parts A, B, C, D, E and F.

Dwelling. A dwelling is your home. This policy coverage under Part A is intended to pay for almost any damage to your home and structures attached to it, such as garages and storage units, when the damage is caused by a covered reason for loss.

When you take out a homeowners insurance policy, note that you may be required to obtain a minimum level of coverage by your lender. Above that, it’s up to you to choose the dollar amount of coverage on your dwelling and any special riders you may need. A common estimate of your coverage amount is based on the current cash value or the replacement value of your home, depending on your policy. It’s a good idea to purchase insurance that covers the replacement value.

The dwelling coverage should be re-evaluated every year and changed as necessary to account for the appreciation of your home.

Other structures. Part B coverage pays for damage to structures not attached to your home, such as fences, tool sheds, detached garages and guest houses. Other structure coverage is typically 10% of your dwelling coverage limit. However, your needs may differ based on your situation. Make sure the coverage percentage fits the amount you need.

Personal property. Personal property, or Part C coverage, reimburses you for the value of your possessions, including furniture, electronics, appliances and clothing. This coverage is normally 50 to 75% percent of your dwelling coverage limit and can vary as needed.

If there are personal items you want specific coverage for like jewelry, art or collectibles, you can add additional coverage to your policy through riders. These additional riders will only add coverage for the specific item listed. Be prepared to provide your insurance company with an official appraisal of the item to verify its value.

Homeowners insurance type and typical amount of coverage

*Different policies will cover different versions of the “value” of your house, from current cash value to replacement value to an “extended” replacement value.

Loss of use. If you’re displaced after a fire or other damage to your home, your homeowners insurance policy may cover some of the expenses you incur from the loss of use of your home. This section — Part D — is sometimes called “additional living expenses” and can cover incidentals like the cost of lodging, meals, laundry and parking.

This coverage is normally 20% of your dwelling coverage limit.

Personal liability. If someone has an accident on your property, you could be liable. That’s where liability coverage — Part E — can protect you against legal claims arising from accidents to others on your property. You choose the level of coverage you think is best. Like auto insurance, your premium may change depending on the dollar amount you choose.

Medical payments. Part F pays for the medical bills if someone is hurt on your property or by your pet. It does not cover the medical expenses of yourself or family members who live on the property. Your medical insurance should cover that.

Again, you choose the amount of coverage that works for you. Keep in mind your premium may change depending on the dollar amount you choose.

Purchasing the right policy

Policies can be complicated. Whether this is your first time buying a homeowners policy or you’re looking for a new homeowners insurance carrier, your policy should meet your coverage needs at a cost you can afford.